Development in Vietnam: Policy Reforms and Economic Growth 9789814379281

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DEVELOPMENT IN VIETNAM Policy Reforms and Economic Growth

The Institute of Southeast Asian Studies (I SEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The Indochina Unit (IU) of the Institute was formed in late 1991 to meet the increasing need for information and scholastic assessment on the fastchanging situation in Indochina in general and in Vietnam in particular. Research in the Unit is development-based, with a focus on contemporary issues of political economy. This is done by resident and visiting fellows of various nationalities. To understand the Vietnamese perspective better, the Unit also has a regular programme whereby scholars from Vietnam are invited to do research on issues of topical interest.

DEVELOPMENT IN VIETNAM Policy Reforms and Economic Growth

Vu Tuan Anh Institute of Economics, Hanoi

11!1!!111!! Indochina Unit

liillll&lliil INSTITUTE OF SOUTHEAST ASIAN STUDIES

This volume was published with the financial support of the Konrad-Adenauer-Stiftung, Germany

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1994 Institute of Southeast Asian Studies, Singapore

Cataloguing in Publication Data Vu TuanAnh. Development in Vietnam : policy reforms and economic growth. 1. Vietnam--Economic policy. 2. Vietnam--Economic conditions. I. Title. HC444 V98 1994 sls94-37452 ISBN 981-3016-83-3 ISSN 0218-608X

The responsibility for facts and opinions in this publication rests exclusively with the author and his interpretations do not necessarily rf{flect the views or the poliry of the Institute or its supporters. Typeset by International Typesetters Printed in Singapore by Vetak Services

Contents

Introduction

1

Chapter 1: Economic policy reforms 1 The reform process 1.1 The period 1976-79 1.2 The period 1980-86 1.3 The period 1986-92 1.4 Some main features of the economic reforms 2 Trends in Vietnam's economic development 2.1 Towards a multi-sector (or mixed) economy 2.2 Switchover to the market economy 2.3 Renewal of industrialization and external economic policies

3 3 3 5 7 8 9 10 23 38

Chapter 2: Economic growth in the reform process 1 Growth rates of national income 2 Growth rates of gross domestic product

45 46 53

Chapter 3: Challenges and perspectives of development 1 Economic reforms and the social aspects of development 2 Economic reforms and the natural environment 3 Dilemmas of future development

59 59 60 62

Concluding remarks References About the author

65 67 69

Introduction

Vietnam is a medium-sized country, with an area of about 331,700 square kilometres, and a population of about 70 million. It is blessed with rich natural resources, with considerable reserves of coal, oil and gas, bauxite, and rare earth, as well as luxuriant vegetation throughout the year, thanks to the humid tropical climate. It also has a large labour force, which is younger in age and better educated compared with other countries at a similar level of per capita income. Good workmanship, creativity, and a high regard for innovation are inherent in the Vietnamese, and this enables them to quickly absorb scientific and technological advances. Vietnam's ability to safeguard its independence as well as overcome great socio-economic difficulties in past decades provides grounds for believing that with a capable leadership at the helm implementing appropriate and timely policies, the country is able to hasten up its pace of economic development and participate in the world economy. Vietnam's history saw incessant wars waged till the mid-1970s to safeguard the country's independence and unity. Partially on account of this, many generations of Vietnamese had missed out on the opportunity to learn and accumulate experience in the field of economics. North Vietnam's centrally planned economy was based on that of the Soviet Union and other socialist countries, though this model was greatly altered by war circumstances. In South Vietnam an economy

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with a colonial structure continued to survive, and it relied on preferential aid and assistance from the powers that participated in the war. After the unification of the country in 1975, Vietnam was intent on working out a path of development suited to its own unique conditions, and this it did largely by trial and error. Hampered by the deficiencies and innumerable obstacles of an underdeveloped and a war-ravaged economy, Vietnam nevertheless struggled to renew its economy, and this within the context of a rapidly changing world. Finally, a marketoriented economy together with its new institutions has begun to take shape. Vietnam's success is all the more remarkable given the fact that right after the war, Vietnam found itself served with a trade and investment embargo from the West. Caught in this fix and hampered by other innumerable difficulties, Vietnam decided on economic progress as the way for it to integrate into the world and regional economies. In the economic domain, this has found expression in a considerable increase in productive capacity in various areas of economic activities and in the ever-growing trade exchanges between Vietnam and other nations. Above all, what matters most are the fundamental changes in the economic institution, policies for development, and mechanisms for managing the economy. Many studies have been done by foreign scholars and some international institutions on the Vietnamese economy and its current economic reforms. The present study distinguishes itself from these in that it provides an insider's view of how the reforms took off and how they have been progressing, the nature of the reforms and what they have achieved, their impact on economic growth and development, the challenges they pose, and the prospects of Vietnam's development in the near future.

Chapter 1

Economic policy reforms

1 The reform process The period of economic reforms from 1975 to 1992 may be divided into the following stages: • 1976-79: unifying the country and turning the economy into an integrated whole in accordance with central planning principles; • 1980-86: experimenting and readjusting economic policies to orientate the country towards trade liberalization; • 1986-92: affirming basic orientations for the renewal of economic policies. The main features of policy changes through these stages are given below: 1.1 The period 1976-79 When the Vietnam war ended in 1975, along with the unification of the country's political institutions, the integration of the economies of North and South Vietnam was set in motion. North Vietnam's economic model from the 1950s was based on that of a centrally planned economy. Although the economy was altered by the decades of war the country went through, the following points generally characterized its economy then:

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• The state determined all important economic activities of the entire country through a system of production plans and goods distribution; there were also strict regulations on pricing and interest rates. • The state and the collectives constituted the foundation of the economy, the collectives being heavily subsidized in activities such as investment and credit loans and they quickly developed to become a sizeable part of the national economy. • Large-scale private enterprises were not encouraged to expand further, but were instead singled out to be finally incorporated into either state or collective units. • The market mechanism operated only in small businesses and the household economy, that is to say in only a part of the agricultural, handicraft, and consumer goods retailing sectors. Many capital goods used for production were not allowed to be bought or sold on the market but were allocated by the state's planned distribution system. • The state monopolized foreign trade. Due to historical circumstances, Vietnam's trade relations had been mainly with the former Soviet Union and East European countries through bilateral treaties. Foreign trade companies under the control of the state would implement these trade treaties, and the profit-and-loss account of foreign trade was entirely taken care of by the state. • The finance of the state was not separate from that of state-owned enterprises. The state undertook to compensate for losses incurred by state-owned enterprises by means of subsidies, and when these enterprises chalked up a profit, the profit was channelled back to the state budget. All productive activities were subsidized by the state through its provision of raw materials and other inputs of production, machinery, and equipment imported with aid funds and credit loans, and sold at low prices to state-owned enterprises. For this reason, the budget deficits and foreign debt would have increased along with any increase in output. Such economic policies had helped the state to rapidly realize its goal of industrialization and at the same time provide for the basic necessities of the population and help it tide over the aftermath of war. Such policies were, however, not conducive to motivating individu-

Chapter 1: Economic policy reforms

5

als and companies to boost enterprising economic activities. The economic institution had no room for private individuals' creativity and business dynamism. Thus, although income distribution was egalitarian and all members of society were assured the basic necessities of life, there was, however, no incentive for its people to use their talents or assiduity in work to make bigger contributions to the country- and this is particularly important for a country at a low level of development. Another point to note is that foreign aid constituted a considerable proportion of the state budget then, and its reduction in 1979-80 thmst to the fore the weaknesses of the out-moded practices of the existing economic institution. Obviously, the economy's growth was still hampered by the centrally planned system. More had to be done to loosen up the economy. 1.2 The period 1980-86 The 1976-80 five-year plan was the first medium-term economic development plan of unified Vietnam. After the Vietnam war, over-optimism in the country's capacity for economic development led state planners to set overly high objectives for their five-year plans, which were of course unrealizable. In 1980 food production in fact attained only 69 per cent of its target; coal, 52 per cent; electricity, 72 per cent; sea fisheries, 40 per cent; cotton fabric, 39 per cent; paper, 37 per cent; and so forth. This failure to achieve production targets forced up ideas for reform in a number of important economic areas. Initially, businesses and households at the grassroots level showed considerable concern over the declining output and set about to turn it around at all costs. Reversing the trend called for a major revamp in its economic activities, policies, and the existing institution. New ways of making the economy function were tested and implemented where found appropriate, and the state greatly reduced its direct bureaucratic interventions in the economic domain. The first change in economic policies was announced in the conclusions made at the September 1979 session of the Communist Party of Vietnam Central Committee, calling for policies to increase business efficiency: liberate economic activities, change the priority given to

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large-scale heavy industry and instead encourage small- and mediumsized consumer goods industry, and heed the interests of individual workers. This brought about a number of concrete changes in various areas of the economy. In agriculture, the contractual quota system already tried out in pilot projects by a number of agricultural co-operatives was widely applied in every farmer's household. In industry, the state authorized state-owned enterprises to freely operate beyond the assignment of state plans. Alongside production liberalization, the state continued to maintain monopoly in a limited number of goods, gave more freedom to the circulation and exchange of commodities, and proceeded with two major price readjustments, one in October 1981 and another in October 1985, to narrow the gap between state-fixed prices and marketdetermined ones. Businesses were permitted to buy and sell raw materials and other inputs of production, and machinery and equipment in the free market. In foreign trade the state loosened its control, and more and more companies operating at the local and branch levels were allowed to directly export and import goods themselves. Now voluntary commercial relations coexisted with the central planning system. The changes first and foremost affected the macroeconomic sphere. State-owned and collective units, which formerly had no self-governing rights but only dealt with related units on a vertical basis, with state organs higher up in the hierarchy, now developed horizontal relations, that is, relations between other units based on market requirements, and were authorized to make decisions regarding activities beyond the assignment of state plans. The capital goods market had formed and the consumer goods market was becoming more attractive, with a wide variety of domestic and imported goods catering to consumers' tastes and requirements. Seizing the opportunities of a more liberal climate, small family and other private enterprises had sprung up to participate in the fast-growing economy. Macro-economic reforms compelled institutional changes. Reforms in prices, wages, fiscal and monetary policies were discussed at policymaking bodies, and major readjustments were effected in trade and price liberation and in reducing the budget deficits. Some readjustments initially failed to bring about the expected results, but improved on fine-tuning. The initial changes in economic policies had helped the economy

Chapter 1. Economic policy reforms

7

overcome the recession that was then on in fiscal year 1979/80, with the result that Vietnam was able to secure a relatively high rate of growth. Despite this, the economy continued to be beset by many weaknesses: the state continued to maintain as in former times its administrative management and its subsidization scheme towards state-owned businesses, with scant heed to economic efficiency, and failed to provide for stability in the macro-economic environment (there was a growing fiscal deficit, a high rate of inflation, readjustment instruments such as taxation and bank credit were not employed in time, and so forth). Furthermore, the state sector continued to enjoy subsidies financed by long-term loans from the former Soviet Union. The former Soviet Union and East European countries continued to supply raw materials and other inputs of production and remained a stable market for Vietnam's exports. To free itself for greater growth, more comprehensive reforms were required. 1.3 The period 1986-92 The path taken by Vietnam's economic development was marked by important conclusions on the system of concepts regarding economic renovation drawn up by the Sixth National Congress of the Communist Party of Vietnam in December 1986. The following changes in policies were mapped out: • confirming the long-term development of the multi-sectoral economy: this meant eliminating the former discrimination against the private economy, allowing them to compete with other sectors on an equal footing in a healthy competitive environment; • confirming the importance of market relations in the economy; • renovating the economic structure, using available resources to meet three main objectives: developing agriculture, promoting the production of consumer goods, increasing the export of goods and services, and enlarging its external economic relations; • stabilizing the socio-economic environment by reducing the inflation rate, the budget deficits, and excessive government expenditure (mainly in cash), and improving the standard of living of its people; • practising an open-door policy in relations with foreign countries.

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Vu Tuan Anh

Although the above-mentioned renovative line looked promising, the failure of the price and wage reforms effected by the end of 1985 (see section 2.2.3) seemed to have put policy-makers in a very awkward position for the period 1986-87. All decisions taken at the macroeconomic level during this time seemed to be only short term in nature. It was not until1988 that many of the strategic policy changes outlined in the conclusions of the Sixth Party Congress were implemented. 1.4 Some main features of the economic reforms

Vietnam's shift from a centrally planned economy to a market-oriented one is different from the experience of other nations that have undergone similar reforms. First, the economic reforms took place at a time when the war had just ended and the country was trying to rebuild itself up from the devastation. That changing background was favourable for reforms to take shape, because of forces from within the economy pulling in two directions: namely, from the grassroots upward, that is, from the businesses and from the internal situation of the population, and from the centre downward, that is, from those at the helm. This two-way relationship between the "grassroots" and the "centre" had admirably contributed to unanimous understanding, perception, and response to the need to readjust economic policies where they proved to be not in line with reality. One of the unique features of Vietnam's reforms is the relatively harmonious combination of spontaneous reforms at the grassroots level and decisive action at the highest level of the political leadership, and this possibly explains why the Vietnamese reforms had attacked the basic foundations of the old socio-economic model without producing the kind of deep recession that had taken place in some other former centrally planned economies that went through economic restructuring (for more on this, see Chapter 2). Second, the need for economic reforms had arisen from the economic area itself, not as a consequence of political upheavals. The change from war-time to peace-time had brought about an increase in demand for the necessities of life. To increase output, obstacles in the economic institution had to be removed so that the economy could function more smoothly. In other words, pressing reality had "thawed

Chapter 1 Economic policy reforms

9

out" dogmatic theories and called for a new workable system. The nature of Vietnam's reforms was not merely one of switching from an old model that no longer worked to one borrowed from another country. In fact, elements of the old model were discarded and replaced by elements deemed to be more suited to Vietnam's circumstances, and this it did by trial and error. In recent years Vietnam's decision-makers seem to have been strongly influenced by the monetarist school of macro-economic stabilization and the restructuring and sequencing measures put forward by World Bank and International Monetary Fund experts. As there is no ready reform scenario or general "road map" available that Vietnam could use as a guide, it has to work out its own short-term action plans, treading slowly and tentatively, and ready to shift gear when necessary. Fortunately, the reforms seem to have been favourably accepted by the people. Third, Vietnam's reforms happened in the context of political and economic isolation. External economic support for the reform process was negligible. Aid and credit from the East European countries and the former Soviet Union countries were cut off from the time these countries began their own perestroika (economic restructuring). Powerful international financial institutions such as the World Bank, the International Monetary Fund, and the Asian Development Bank had provided no assistance except for consultation. Aid from bilateral governmental agreement had been channelled mostly for social purposes. Furthermore, the economic blockade and embargo against Vietnam and the involvement of the country in various political and military conflicts, had compelled it to consume many resources that could otherwise be used to fuel its economic growth and development. The absence of a secure and friendly international environment had been a great drawback to the reforms. Against such a bleak background, the fact that Vietnam managed to remain an independent and united country thoughout the reform process is certainly something the Vietnamese can be proud of.

2 Trends in Vietnam's economic development The reforms have brought about the following main trends in Vietnam's economic development.

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Vu Tuan Anh

2. 1 Towards a multi-sector (or mixed) economy 2. 1. 1 Structural changes

In Vietnam's economic ideology, the national economy could be divided into several economic sectors on the basis of forms of ownership and means of production. The following main sectors are officially recognized: • the state sector, based on public or national ownership; • the collective sector, based on the voluntary contribution of capital by a group of people to set up joint enterprises and using the labour force of the collectives' members and their relatives; • the private sector including the family or household economy, individual economy, private capitalist economy (the last form hires a certain number of labour, while the first two use own labour); • the joint economy of the state sector together with other sectors, known as the state-capitalist sector. Previously, the state and collective sectors constituted the main part of the national economy. The private sector, especially the private capitalist economy, was not encouraged to develop but was instead the target of nationalization, collectivization, or transformation to stateprivate joint ventures. With the present reforms, enterprises of all ownership forms receive equal treatment before the law; all are accorded business autonomy; and all compete equally in the market. It is difficult and also not necessary to distinguish between the various sectors mentioned above. In fact, there still exists differences in terms of motivations and attitudes between the state and non-state sectors. Policy changes in the past years have brought about structural changes to the economy. Although there are only minor modifications in the structure of national income (value added in material production), the structure of the labour force is beginning to change, with an increasing number of the labour force going into the private sector (see Table 1 and Figure 1). Although the restructuring has been brought about by policy changes, it is undoubtedly also aided along by market forces to overcome obstacles that get in the way of the restructuring. During the transitionary period, sectors are affected differently by

Chapter 7 Economc po!;cy reforms

11

Table 1 Structural changes of economy on economic sectors (in percentage; total = 100 per cent) State sector

Non-state sector

National income 1986 1991

29.8 29.0

70.2 71.0

Labour in whole economy 1986 1991

14.7 10.4

85.3 89.6

Gross output of industry 1986 1990

56.3 58.6

43.7 41.4

Labour in the industry 1986 1990

30.0 33.0

70.0 67.0

Source: Statistical Data of the Socialist Republic of Vietnam 1986-1991 (1992).

the policies and evolve differently. Each of them is considered in greater detail below. 2.1.2 The state economy

The state economy plays a key role in the industrialization of the country, and the government uses it as a tool to regulate macro-economic and social policies. Over the past dozen years, the state economy in Vietnam had expanded quickly: in 1976 there were about 7,000 stateowned enterprises, and by the end of 1988 this figure had increased to 12,000. Thus, the state economic sector has always played a very important role in its economic growth. In 1991 it made up 29 per cent of the national income of material production, and produced 69.7 per cent of the value of industrial output. With the handling over of self-governing and self-financial accounting rights to state-owned businesses, the state economic sector has engendered much discussion among economic policy-makers. The

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Figure 1 Growth and structure of industry (in billion dong; in constant prices) 15 14 13 12 11 10 Ol

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1980

1981

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1983 1984

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1986

1987

1988

1989

1990 ~

Year

C' (b

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State industry

ffi

Non-state industry

Q Whole industry

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Chapter 7 Economic policy reforms

13

problem lies in the fact that in the past the state-owned economy took shape and expanded without considerations being given to economic efficiency, and when state subsidies (in the form of low interest rates of credit loans made available to them, low prices of raw materials and other inputs of production sold by the state to them) were withdrawn from them, a considerable number of businesses in this sector found themselves in great difficulties. According to the data, as much as 38 per cent of the 12,084 state-run businesses were operating at a loss in early 1990. The firms that suffered losses in their undertakings accounted for 38 per cent of the total assets value and 33 per cent of the total work-force in the state economic sector. The aims of the reform measures to restructure the state economic sector are as follows: 1. To reorganize this sector and decide on the areas of activity that should remain under state control and ownership. Businesses whose duties are to provide public goods and services and the necessities of life such as electricity, coal, cement, railway, and civil aviation have to be further developed and consolidated. In order to help them function on a self-governing basis, the state reevaluates their assets and leaves them in their charge on condition that they preserve and multiply those assets. The business management apparatus was restructured with the founding of an administrative council and executive managerial board. All enterprises have cost-accounting and book-keeping and the records are kept under the strict control of the state. Since the end of 1991 all state-owned enterprises have to reorganize their businesses, and be re-registered by the court. According to the report by the State Planning Committee in December 1992, ofthe 9,000-9,500 existing state enterprises about 70 per cent would be licensed to further operate as state-run enterprises. 2. With regard to enterprises that the state deems unnecessary to keep under its ownership, for instance light industrial factories, the process of privatization will be effected by selling the whole business, or selling shares of it, or leasing the business out to collectives and individuals. It should be recognized that in Vietnam the number of private capitalists is still small, and without large financial resources they

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are seldom able to buy a big business with their own money only. They are also wary of the unstable business environment. Even managers and employers of state-owned enterprises do not feel highly enthusiastic about equitizing their enterprises because that might adversely affect their current jobs and benefits, especially when their enterprises are performing well and making a profit, and they are drawing a good income. For the above reasons equitizing or leasing out businesses is still in its experimental stage and developing at a rather slow pace, although the government has been encouraging it since 1990. In June 1992 the government issued a decree on the experimental equitization of some enterprises. Seven profit-making and medium-sized enterprises in the light industry such as plastics, wood processing, and garments have been selected for the trial, and the equitization process is moving slowly. The faster equitization would be done by a number of stateowned businesses with the participation offoreign investors. Joint ventures with foreign capital for the purpose of improving part of the enterprise or setting up a line of new products have really turned businesses into joint-stock companies that operate more efficiently and effectively. The Vietnamese Foreign Investment Law encourages this form of joint venture and in practice the majority of foreign investment projects bear the joint-venture character in the form of joint-stock company. 3. With regard to businesses that the state deems unnecessary to keep under its ownership, and that are suffering losses, it would be preferable to close or dissolve them if such businesses are facing obsolescence and their products are no longer competitive on the market. About 2,500-3,000 such enterprises have disbanded up to now. On the assessment of the State Planning Committee, among the 9,000 to 9,500 currently existing enterprises 38 per cent of them have to be disbanded or be merged with others. Among centrally managed enterprises, the proportion of such enterprises is 20 per cent, but among locally managed enterprises it is about 46 per cent. The foremost problem the state faces thereby is creating new jobs and giving relief to workers who have lost employment in the state sector. In recent years most of such people were transferred to the household and individual economies. With relatively small state relief

Chapter 7. Econom1c policy reforms

15

and loans they could start up a small business in a trade or handicraft. Another solution is to make an investment in these unproductive establishments to transform them into something more profitable and then privatize them. But this cannot be easily done as the state lacks funds for such an undertaking. 2. 1.3 The collective economy

Based on the socialist thinking that collectivization greatly benefits socialist development, Vietnam laid great emphasis on the formation of collectives in all economic sectors. By 1975 there were 17,000 agricultural co-operatives in the North. These co-operatives were relatively small in size, with 60 per cent of them having less than 60 hectares of cultivated land and involving less than 100 household members. 30 per cent of them cultivated 100 to 200 hectares of land and had 100 to 300 household members. Agricultural co-operatives played a sizeable role in production and in rural development during the war. They were responsible for organizing production in rural communities, mobilizing and supplying agricultural products at low prices and human resources for defence and for industry. They were involved in the provision of social insurance, education, and health care, and the building of infrastructure. They also contributed to charitable organizations, gave advice in family planning, and looked after the health of women and children. In fact they functioned not as pure economic units but more than that, as competent socio-economic units wielding greater power than the governmental administration of the village. This co-operative model was well suited to solving problems of social security and equity in rural communities, but failed to motivate peasants to be enterprising economically. Here was the "vicious circle" of an economy at a low level of development: poor economic outputuniform distribution of income -loss of economic motivation- poor output again. After 1975, effort was made to apply the type of agricultural collectivization used in the North, to the South. In the middle of 1980 there were 1,518 agricultural co-operatives with an average size of 312 hectares of cultivated land, 519 households, 1,000 workers. There were also 9,350 mutual aid teams with a few dozen households. The massive collectivization did not receive the support of the peasants, and the greater

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efficiency achieved instead adversely affected social life in rural areas, and peasants lost motivation in intensive cultivation and investment. During 1976-81 food production in general remained stable, not exceeding 15 million tons annually, and the state had to import a considerable amount of food to meet the needs of the population. The situation became so bad that various co-operatives in the Mekong delta finally collapsed. The contract system widely used in agricultural co-operatives from the end of 1980 had opposing effects on the co-operative economy. On the one hand, it immediately halted the dispersion of co-operatives as it reformed the distribution system into co-operatives. On the other hand, it led to a deeper privatization of production and businesses, which inevitably resulted in a reduced role for co-operatives in the economic as well as social life of rural communities. In contrast to the cooperatives, households involved themselves in more business activities and grew to become the main productive unit. In such circumstances many agricultural co-operatives could not continue to function as economic units. Some became equitized; others that continued to exist performed fewer economic activities. As in agriculture, the collectivization of small-scale producers and traders has also been happening in industry, handicraft, trade, and other economic activities in the North from the 1960s and in the South after 1975. By 1988, there were in the whole country 32,034 collective units in industry and handicraft utilizing about 1.2 million workers and producing 23.9 per cent of the total value of industrial output. There were about 15,000 goods and drugs collective stores sharing more than 20 per cent of the retail value in commerce. In agriculture, collective units were of primary importance. But in industry and other sectors, collective units occupied only secondary position in the so-called dual economy, with state enterprises in the lead, enjoying advantages in capital, technical equipment, skilled labour, and material supply. Agricultural collective units acted mainly as intermediaries for state enterprises, producing simple items and spare parts for industrial use or as retail agents in trade and services. They relied on state subsidies received directly in the form of cheap credits and low-priced raw materials, and indirectly through contracts signed with state enterprises. Policy changes before 1989 did not negatively affect the growth of

Chapter 1 Economic policy reforms

17

the collective economy as the state subsidy system still in operation guaranteed a stable supply of raw materials and other inputs of production at prices fixed by the state, and the market to take up the output of co-operatives had also been worked out beforehand. Moreover, market liberalization encouraged co-operatives to diversify their mix of production, and many of them made huge profits in the free market, selling at higher prices products made from materials bought at low prices from the state. When low-interest loans and low-priced materials were withdrawn from state and collective enterprises in 1989, all businesses had to compete in the market, and the collective economy shrank considerably. Many co-operatives were forced to shut down or become privatized. By 1991 the number of collective industrial units had decreased by 70.7 per cent, the collective labour force by 72.3 per cent, and the value of this sector's output by 70 per cent. The proportion of the output of the collective sector in total industrial output had decreased from 27.1 to 6.8 per cent. A similar situation was seen in the collective economy in trade, services, and other sectors. During 1986-91 the ratio of the value of cooperatives' retail goods and services to that of the whole trade sector decreased from 14.6 to only 1.8 per cent. The collective units are currently in a crisis, and most economic resources have transferred to the private sector. Previous small-scale collective producers have returned to become small private entrepreneurs or have chosen to work for others. Although the state maintains that the collective sector is important in the long-term development of the socialist-oriented economy, the fact is that this sector is stagnating. 2.1.4 The private economy

(1) 80 per cent of the country's total population are located in the countryside, where privatization is proceeding at a fast pace. Going by the new policy, the household is a self-governing economic unit; previously, however, only agricultural co-operatives were regarded as self-governing economic units. This change has given rise to a series of major socioeconomic transformations in rural areas. New relations concerning the use and location of land have taken shape, and land is apportioned to farm households for different periods of time: wet paddy land is usually distributed by those in power in the village to farmers' use for

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twenty years, and forestry land for fifty to seventy years' use, depending on the kinds of trees cultivated. While formerly the co-operatives organized labour and made business decisions, now households also take on these tasks. Buying and selling between farm households on the one hand and co-operatives and state-run businesses on the other are no longer regarded as commercial dealings on a vertical basis, between levels of the hierarchy, but are rather dealings on a horizontal basis, between equals, and based on market principles. Except in the high mountainous areas, the household economy in most rural areas has become developed, at least as expressed in the growth in agricultural production (see Table 2). Rapid changes have also occurred in the division of labour, trade structure, forms of economic sectors and services in rural areas to say nothing of emigration, transfer of labour, income differentiation, and so forth. These changes are very conspicuous in areas adjacent to towns and cities and in the plains as well. Thus while in the past the rural economy centred around agricultural co-operatives, now economic activities in the countryside involve many individuals, households, and collectives, with households playing the essential role. The rural household economy faces a number of difficulties. Firstly, the rural economy in Vietnam remains basically agricultural, with crop cultivation as the main economic activity. Agriculture contributes about 75 per cent of the gross social product and absorbs 80 per cent of the labour force. Crafts and non-agricultural services are not popular activities with a large number of households. While the rural population is increasing relatively fast, at a rate of about 2.5 per cent, Table 2 Average annual output of agriculture 1976-80 Production of food crops (million tons in paddy equivalent) Yield of paddy (tons/hectare) Production of food per capita (kg./year)

13.3 20.2

254

1981-88

17.6 26.6

294

1989-92

22.2 32.0 330

Source: Statistics Publishing House, Statistical Data of the Socialist Republic of Vietnam, 1976-90, 1986-91, 1922 (1991, 1992, 1993).

Chapter 1 · Economic oo!icy reforms

19

the scale of cultivation is limited by the land available. There is on average only about 0.5 hectares of cultivated land for a household of four to five. The gap between supply and demand concerning rural labour is worse: currently an estimated 6-7 million persons are underemployed in rural areas. Secondly, the rural areas are still poorly developed. In the past, infrastructural projects were realized mostly by the fund and labour of co-operatives. Individual households were not able to carry out this kind of construction, and the local authorities lacked the budget and technical staff for such works. In spite of the larger state outlay in infrastructure development (main roads, electricity network, irrigation systems), the poorly developed infrastructure remains a considerable obstacle to rural development. Thirdly, most of those who change from being wage workers in agricultural co-operatives to becoming self-governing producers lack the necessary technological knowledge, marketing experience, and financial and technical means. Former co-operatives were able to provide technical services, and material and financial advances to their members, and some of them successfully extended non-food crop cultivation, breeding, and non-agricultural industries and services, creating new jobs for their members. The recession in agricultural co-operatives created a gap in those kinds of supply in rural communities. The results of a survey on 4,000 rural households in five provinces conducted by the General Statistical Office in 1989 show that the incomes of households involved in plain agricultural production accounted for only 77.9 per cent of the incomes of households handling various businesses and 54.5 per cent of households in specialized non-agricultural business. Measures were taken to provide support to rural households to develop agricultural and forestry production, to diversify economic businesses, and to generate income. The Bank of Agricultural Development extends credit at low interest rates to households. Many localities established peasants' revolving funds managed by social associations of communities. New collective units of production, trade, and services have been set up on the initiative of those wanting to concentrate their financial and human resources. The government has worked out a special development programme of job creation. And how to quickly develop more than 10 million households in rural areas is still one of the key problems of development strategy.

20

Vu Tuan Anh

(2) In the non-agricultural sector, policies advocating the development of the private economy have been issued. At present there are no legal restrictions whatsoever concerning the founding and promotion of private businesses, irrespective of the scale of the undertaking or the number of hired labour, and these businesses are free to decide on how to use their respective assets and profits after payment of their tax dues. However, in the economic domain related to national defence and social security such as weapons, explosives, mass media, overseas shipping, and air communication, private individuals are not encouraged to participate. Nevertheless, individuals interested in getting into this domain are required to apply for special authorization from the government (according to the law on private businesses promulgated on 2 January 1991). With these policy changes to private businesses, the economic activities of the private sector saw a dynamic growth. There are two kinds of businesses to be distinguished: (a) private companies, which are registered with the authorities and have juridical personal rights; (b) familial (household) and individual businesses, which usually are small in scale and belong to the informal (unstructured) economy. Up till the end of 1992, there are 2,585 licensed private enterprises with total capital valued at 1,032 billion Vietnamese dong (US$100 million). Most of the private enterprises have been established and are operating in the biggest urban centres. There are 488 enterprises in Ho Chi Minh City, 362 in Hanoi, 297 in Dongnai, 165 in Quangnam-Danang, 85 in Haiphong. According to available statistics, the average scale of an enterprise is still small. The average capital per enterprise is US$39,000 in the whole country, US$92,200 in Ho Chi Minh City, US$91, 700 in Haiphong, US$27,000 in Hanoi, US$19,700 in Dongnai, and US$12,100 in Danang. In recent years, private businesses have rapidly expanded in trade and services. In 1985 the number of private traders stood at 636,800, and in 1991 as many as 891,900 were registered as such. The proportion of the private sector in retail sales had increased from 41.2 per cent in 1985 to 73.1 per cent in 1991. In industrial production, the number of private enterprises have not stabilized. This is clearly evidenced by the following figures: in 1986 there were altogether 565 private enterprises, in 1988 only 318 operated, in 1989 the number increased to reach the 1,284 mark, and in 1990

Chapter 7: Economic po!;cy reforms

21

the number decreased to only 770. However, households engaged in handicrafts and small industries have continued to diversify their activities, and their numbers have increased. In 1988 there were only 318,557 such units, but by 1990 as many as 376,930 units were registered. According to a survey conducted in 1991 by the Ministry of Labour, War Veterans, and Social Affairs, involving 1,008 businesses in five provinces, 80 per cent of them were private ones. In both urban and rural areas, about 60 per cent of private businesses have been founded since 1988. The average number of workers in a private business in urban centres was 13.7 persons, of whom 11.4 persons were hired workers. The value added by them amounted to US$12,600 annually. Family-based businesses were of a smaller scale: an average of 4.8 persons worked in such businesses, of whom 3. 7 persons were unpaid household members, with value added per annum of about US$3,600. Half of private businesses in three major cities, namely, Hanoi, Ho Chi Minh City, and Haiphong, started out with an average capital investment of over US$6,300, while nearly one-half of family-based businesses operated with assets valued at less than US$900 each. In the countryside, private businesses were much smaller in size compared with those in urban centres. The data show that the gap between the so-called private business (company) and family-based business (household and individual economy) is not too large. The failure of private industrial businesses to achieve rapid development can be explained by several factors. First and foremost, the macro-economic environment is unstable: a high inflation rate, restricted credit, and unstable prices. The capital required for investment in trade and services is mainly fixed capital, not so much capital to invest in the production process itself. Secondly, measures to encourage a buoyant economy are still insufficient in the legal area. Banks are not able to provide long-term loans to private enterprises because of limited financial resources. Most private enterprises operate on their own capital, with only a small number taking loans from banks for business purposes. According to a survey of 300 private enterprises conducted by the Central Institute of Economic Management in 1991, only 8 per cent of enterprises in Hanoi and 18 per cent in Ho Chi Minh City had obtained bank credit. The collapse of the credit co-operative system in 1990, due to swindling

22

Vu Tuan Anh

by some private businessmen and the lack of state control in the financial market as well as the bankruptcy of some dozen private enterprises in Hanoi and Ho Chi Minh City put the private sector in a bad light in its initial booms. Thirdly, another factor limiting the development of the private sector is the competition posed by foreign goods imported, both officially and unlawfully (that is, smuggled). Imported goods have a competitive advantage in the internal market through their better quality and lower prices compared with goods produced locally using backward technologies and out-of-date equipment. 1992-93 saw the implementation of a stringent control against smuggling and a readjustment of taxation on imported items. These protectionist measures have a positive effect on the development of domestic production. The family economy, though having a low productivity, has rapidly expanded as it offers good possibilities for creating jobs and providing a decent income to the poor. It uses raw materials abundantly available in the locality, and most (60-80 per cent) of its goods and services are sold on the local market. Furthermore, the capital outlay required is small. It seems that the importance of the family economy lies more in ensuring immediate subsistence for the population than as a means for the latter to get rich and enjoy a stable future. Although in the long-term future, native private productive entrepreneurs may be a dynamic engine of economic growth in Vietnam, at present they are not much of a force to reckon with. The Vietnamese economy is still not well developed. Annual gross domestic product per capita is around US$200. The savings of the population are hardly substantial and the number of those able to save big capital is limited. According to some Vietnamese economists the value of the population's savings could be estimated at US$1 billion, of which US$400 million are held in gold reserves and foreign currencies, US$300 million in Vietnamese currency, and the rest in real estate. In order to make people confident about lending capital to private businesses, the state has to provide a supportive business environment, improve macroeconomic policies, establish a more appropriate legal and regulatory framework, improve the financial and banking systems, and provide the necessary infrastructure and services. This certainly cannot be expected to come about overnight.

Chapter 1: Econom;c po/;cy reforms

23

2. 1. 5 The state-private joint economy

In a planned economy, economic units have mostly vertical relations with their administrative organizations. Horizontal economic relations are not developed because most buying and selling would have been settled beforehand. In a mixed economy, horizontal relations between enterprises in different sectors are necessary for economic efficiency: the stateprivate, the state-co-operative, and the state-co-operative-private corporation relations are the norm in a diversified economy. In Vietnam's economic reforms, the state has been encouraging joint ventures between state enterprises and businesses of other forms of ownership and seeing them as an effective tool to regulate the nonstate sector. In 1988 the government decree on joint business and economic integration officially accepted and stimulated the diversification of domestic joint ventures. At the same time the law on foreign investment defined "joint venture" as one of three main forms of business organization. Although the joint business, which the authorities refer to as "a separate economic sector" (the state-capitalist sector), is widespread in the current economy, the policy-making authorities regard it as simply another form of business organization. It is difficult to assess the scale and level of integration between the state and the private economy and the effects of this integration on the state and on the private economy. As this kind of business will become increasingly important in the future mixed economy, the effects of this integration merit attention.

2.2 Switchover to the market economy Vietnam's switchover from a centrally planned economy to a marketoriented one is accompanied by the following changes in policies: 2.2. 1 The role of the state in economic development

The first and foremost policy change was a new definition of the role of the state (hereby understood not only as government, but as the political and administrative leadership) in the development of the whole society, especially economic development.

24

Vu Tuan Anh

This is not the first time when the question "What role should the state and the market play in the economy?" is debated in Vietnam. Even under the previous central planning mechanism where the state had a dominant role in the entire economy and market relations were not decisive influences, there were discussions at the theoretical level among economists on this topic. The views are varied. At one extreme, the view is that in conditions of underdevelopment the state has to play the decisive role of planner, promoter of economic development, and as direct entrepreneur. At the other extreme, the role of the state is minimized to taking on only what the private sector does not want to do or cannot do because it is not viable for them to do so. Between these extremes are variations as to the nature and level of state intervention in the economy. Even though socialist economic theory sees the state as an absolute necessity and a decisive factor in development, other economic theories provide no insight as to whether state intervention promotes or inhibits economic development. In practical terms, although the state's role in managing and regulating the economy has expanded in many less-developed countries, such as Vietnam, this is far from uniform in all sectors of the economy. Furthermore, there does not seem to be any direct correlation between the level of state intervention and the speed of economic development. Most of the policy-makers and the leadership in Vietnam have shown great interest in the economies of its Asian neighbours such as Japan, South Korea, Taiwan, and Singapore, where the state plays an active role and economic performance is excellent. But this does not explain why other Asian interventionist states such as India and Myanmar have lagged behind. On the other hand, countries such as Hong Kong and Thailand, where the level of state participation in the economy is low, have attained fast economic growth in the last decades, although many others where the state has a small hand in the economy have stalled in undevelopment. So, the debate on the role of the state in Vietnam's economy continues. In the mean while certain guidelines for the practical realization of its economic objectives have been worked out. The following are the tendencies as well as problems pointed out in the policy guidelines of the Vietnamese state on its economic role.

Chapter 1. Econom;c po!;cy reforms

25

(1) The first problem concerns the role of the state as planner and regulator of economic development. The state would give up unrestricted direct intervention in economic activities. The direct planning previously done for all important production, distribution, consumption, saving, investment targets is to be replaced by an indicative one. The state wants to use macro-economic policies and instruments for orientating enterprises to follow plan targets. Commercial dealings have changed from mainly vertical relations (with the state managing organs) to relations on a horizontal basis (between themselves and with consumers). Although official documents have affirmed the leading role of planning, and the state uses macro-economic policies and economic tools (such as taxation, bank interest rates, and so forth) to orientate businesses to arrive at the targets worked out, the "invisible hand" of the market mechanism is still currently the dominant regulator of the economy. There are a number of explanations for this. The first is the lack of a theoretical concept clearly defining the state's role in planning and regulating economic activities to strengthen economic restructuring and development. The second is the poor ability of the state apparatus to manage because of lack of knowledge and experience and a number of its staff are only familiar with managing based on previous administrative methods. The existing legal and institutional framework is not able to respond to market forces, and the economy has to fight against the chaos, imperfect competition, corruption and smuggling, and so forth, of an almost spontaneous free-market economy. (2) The second problem concerns the role of the state as an entrepreneur. The establishment of a public (or state-owned) economic sector is a widespread phenomenon in most developing countries. Regardless of political and ideological motivations, the state directly intervenes in the economy for national and strategic reasons, to accelerate industrialization, and to catch up with developed countries. The degree of their ability to do so differs, however, depending on circumstances. In Vietnam's multi-sectoral market-oriented economy, the state asserts that enterprises in all sectors er\ioy full equality before the law and have the right to control their finance and to freely compete with one another on the market. The state suggests that its role as the monopoly

26

Vu Tuan AntJ

entrepreneur be reduced, and in fact, this role of the state has been diminishing in the last few years. The annual average growth rate of state investment outlays decreased from 9.2 per cent in 1981-85 to -4.6 per cent in 1986-90. Comparing the years 1990 and 1985, the share of the productive sector in total state investment outlays was reduced from 90.2 to 78.4 per cent. Together with privatizing existing state-owned enterprises, trimming investment in production, and encouraging private entrepreneurship, the restructuring process will face increased destatization. A current issue being debated is which public goods and services should be produced and supplied by the state sector; what are the "commanding heights" the state should support; and how to regulate and accelerate the development process. Although some people in the academic or policy-making circles have been putting figures to the ideal proportions of state and non-state sectors in the future economy, those data are not based on the role of the Vietnamese state as entrepreneur, at least in the near future. (3) A similar ongoing debate concerns the role of the state in the redistribution of national wealth, although the decisive role of the market in the distribution of productive resources is accepted. The share of gross domestic product in the state budget and therefore public expenditure is still low in Vietnam (see section 2.2.3). In the current reform process, the state would like to have the power to regulate and correct market failures, for example, to redistribute income and alleviate poverty, but is limited by its ability to allocate a bigger share of the gross domestic product to the state budget. Theoretical concepts and the practical experiences of such models as the welfare state or the social market economy currently attract much attention in Vietnam. 2.2.2 Price reform

Vietnam's transition to a market economy started alongside price reform. The ideas on eliminating the gap between state-fixed prices and market-determined ones have led to price reforms in 1981, 1985, 1987, and finally 1989. Since 1989, prices are no longer fixed by the state, except in the case of items such as electricity, coal, and cement used in major state

C/1aptor 1: Econom1c policy reforms

27

construction projects. And from 1991 onward, only the price of electricity is fixed by the state. Home market prices have moved more in line with world market prices in spite of the fact that the Vietnamese economy has suffered price fluctuations, a serious repercussion ofthe Gulf crisis and the disintegration of the Council for Mutual Economic Assistance (CMEA) in 1990-91. The decentralization of the price decision-making process and the introduction of a free-market price system have given rise to a better balance between total demand and supply in the entire economy and between different regions, encouraging a rapid expansion in commodity production and external economic exchange. The system of price management changed from one extreme of total state-monopolized control to the other extreme of prices set by free market forces without state intervention. The prices of some main items such as rice and gold are not freely adjusted by market forces because of specialized trade enterprises and national reserves. Therefore some failures of the market price mechanism, such as a wide range of fluctuations, unfavourable prices of agricultural products compared with industrial goods and so forth persist. 2.2.3 Financial reform

When external aid was withdrawn from Vietnam, a larger share of the budget was allocated for social purposes (health care and education), defence, subsidizing production through the low prices of imported materials and equipment and so forth. The state budget deficit increased and inflation escalated from the end of the 1970s. Hence, the previous reform of the financial system decided on stabilization as the top priority. The price-wage-financial reform in 1985 was the first comprehensive financial readjustment aimed at decreasing the state budget deficit and the inflation rate. The details of this reform are as follows: • trimming subsidies allocated by the state to enterprises through the low prices of raw materials and other inputs of production; • switching from prices fixed by the central government to a system in which market prices are negotiated between buyers and sellers; • reforming the wage system to do away with the rationing of fixed quantities of food and other necessities (using ration tickets and

28

Vu Tuan Anh

coupons) and shifting to rewards that are determined by market forces (aimed at raising incomes of state workers and employees to compensate for inflation); • readjusting the revenue and expenditure policy of the state budget so as to reduce step by step excessive expenditures and consequently curb inflation. It should be pointed out that owing to shortcomings in the drawing up

of the reform, disunity in implementation, and other inadequacies in the mechanism, the reform as envisaged above failed to bring about the desired results. On the contrary, it engendered a galloping inflationary spiral that led to price escalation. As a consequence, living standards of the population sharply deteriorated, especially that of wage earners. Natural calamities led to successive crop failures in agricultural production in 1987, which rendered more precarious still the socio-economic situation and considerably lowered national income. As I see it, the only truly positive element brought about by the 1985 reform was the abolition of subsidies by the state to businesses, which had to be compelled to find ways and means to operate at a profit and stay viable. The efforts made so far by businesses have helped restore industrial production, and push ahead trade and services to rapidly adapt to the market economy. Since 1988/89, the national financial policy has changed towards an active mobilization of personal savings in the country, a reorganization of the taxation system so as to secure more receipts for the state budget, a separation of the national finance from that of businesses in the state economic sector, and a curtailment of state expenditure to reduce the budget deficit. The foremost problem is to increase the size of the state revenue and to change its structure. See Table 3. Before 1989, taxes were collected from non-state economies. The two main kinds of taxes were the agricultural tax, based on quantity and quality of land used, and the industrial and trade tax, based on turnover of collective and private businesses. For the state sector, the most part of their profit and a part of their turnover (depreciation fund) were transferred to the state budget. The taxation reform has been the first and main step of the whole financial reform. Economically, one of its most important tasks is to

29

Chapter 7: Economic policy reforms

Table 3 Summary of budgetary operations (as a percentage of gross domestic product) 1984

1985

1986

1987

1988

1989

1990

Revenue Tax revenue Transfers from state enterprises Other non-tax revenue

14.5 3.1

17.5 15.5 2.9 3.3

14.6 2.6

12.2 3.4

12.2 4.6

17.5 4.6

10.5 0.9

13.3 17.2 0.9 0.7

10.9 1.0

7.3 1.4

6.7 1.3

7.1 1.1

Expenditure Wages, salary Subsidies Capital Other expenditures

13.4 0.5 5.3 4.1 7.8

22.4 16.0 0.9 0.9 5.8 5.4 9.7 6.1 14.8 11.5

15.3 1.1 5.8 4.5 8.3

16.1 1.9 6.1 4.1 8.0

14.3 4.9

17.4 6.9

4.2 9.3

4.4 5.4

Deficit

-3.3

-5.2

-8.2

-6.4

-4.3

-14.6

-6.7

Source: World Bank, Vietnam: Stabilization and Structural Reforms (1990).

eliminate the administrative supply-withdrawal system of state enterprise finances and to build a new tax system applicable to every business. The new tax laws promulgated included the following kinds of taxes: • agricultural tax collected only in agricultural cultivation (there is ongoing discussion in the National Assembly on a new draft of the law on agricultural tax, which looks to subdividing the current agricultural tax into land tax and agricultural turnover tax); • turnover tax; • profit tax; • special commodity tax (on cigarettes, alcoholic products); • import-export tax; • tax on the use and exploitation of natural resources; • tax on housing and the use of land; • personal income tax. Despite a slight increase in the past years, the tax revenue remains extremely low (only a little more than 4.5 per cent of gross domestic product) compared with other countries in the world. There are still a

30

Vu Tuan Anh

number of flaws in the current tax system that have to be continuously worked upon. Firstly, the theoretical basis of taxation including the major principles of equity (horizontal and vertical), incidence, structure, effects on the output of production, on consumption and savings, on people's lives, and so forth has not been clearly defined. Different requests are made of the taxation system by different groups of people responsible for taxation policy and financial policy-making, such as members of the National Assembly, governmental financial specialists, and local administrators. And there is as yet no common criterion. Secondly, the lack of a theoretical basis means that the current tax system does not take in all possible categories and sources of taxation; and some kinds of taxation do not seem to have a rational basis. A typical case of this is the turnover tax, which is based on the repeated taxation of product value. The feasibility of implementing value-added tax is also being discussed. Thirdly, the effects of the current tax system on economic output and its social consequences have not been sufficiently investigated, so frequent readjustments and fine-tuning continue to be required. That created an unfavourable environment for businesses, and on saving and consumption. Public expenditure has to be reapportioned in line with changed priorities and to reduce the budget deficit. In the last years, two important items in the list of expenditures had been cut off, these being subsidies for state-owned enterprises and defence expenses. The outlay on state economic investment has been slightly trimmed, notwithstanding the higher requirements on infrastructural improvement and the enlargement of "key" industries. The decision to build the trans-Vietnam high-voltage electricity line will increase the share of this item in total public expenditure. The share of funding for health care and education in principle remains as before, but it cannot satisfy the increasing demand of a fastgrowing population. Hence there are good grounds to estimate that expenses in this area will increase. The wage reform plan for the state sector in 1993 would certainly increase expenditure as it suggested including, fully or partially, housing expenses, health insurance fee, old-age pension insurance fee, education expenses and others, which were previously directly subsidized.

Chapter 1: Economic po/;cy roforms

31

The structure of the expenditure budget is likely to see quite a significant change in the coming years, although it is as yet uncertain how Vietnam's decision-makers would prioritize between economic investment and welfare. Overspending of the budget is another problem. During the period 1986-89 the budget deficit was more than 5 per cent of the gross domestic product. This deficit was generally compensated by two measures - issuing new paper money and borrowing. The first measure had been applied a little too strongly and it reinforced the already high inflation. Borrowing maintained the deficit at about 40 per cent only. Most of the borrowing came from external sources, especially from the former Soviet Union. In 1989 Vietnam's external debt reached about US$3.4 billion in convertible currency and 10.5 billion transferable roubles to the CMEA area. Large amounts of external debt in convertible currencies were contracted in the post-war period of 1976-79, mostly to finance food imports, fuels and required materials, and spare parts for reconstruction. Most of the external debt is medium and long term; only US$1.1 billion is short term. With the recent increased exports, Vietnam managed to clear a part of its short-term loans and interest payments, so that its external debt presently stands at US$13.5 billion. In comparison with the annual turnover of its exports, Vietnam is one of many countries having a heavy external debt, though in absolute terms the debt is not big. Since 1990, the state has reduced its reliance on issuing new paper money to compensate for the budget deficit. Instead, it circulates state treasury bonds to borrow from domestic sources. Thanks to the increase in exports and also the cutting off of external loans, the debt/ export ratio has been reduced significantly and Vietnam is able to clear a part of its outstanding debts. While Vietnam continues to look for more sources of funds, the state ought to tighten its control over external loans and clear its debts. On the other hand, measures aimed at consolidating the activities of the state budget, reducing non-urgent and unnecessary expenses, have to be implemented in order to balance the budget and so stabilize the economic and social environment. The fourth problem of financial reform is restructuring the national financial apparatus and management. Vietnam's financial system oper-

32

Vu Tuan Anh

ates at two levels: central and local. At the local level there are three jurisdictions - provincial, district, and village in the countryside or residential in urban areas. In total, fiscal operations are carried out by the central government: fifty-three provincial, more than 450 district, and thousands village jurisdictions. During the Vietnam war and when Vietnam was a centrally planned economy, financial decision-making was strictly concentrated at the central level. Current policy reforms with decentralization and liberalization tendencies have strengthened the decentralized tendency of the financial system too. There is a certain amount of competition between local jurisdictions and the central government for the control and distribution of the budget revenue. A clear division of fiscal responsibility has not been determined. The rules of fiscal operations are still very lax, and are freely modified by every jurisdiction and every competent person. It should be necessary to solve problems of contrast between, on the one hand, decentralization, which stimulates the flexibility and dynamism of local jurisdictions, and on the other hand, the need to establish one "strong" central state with sufficient financial power to encourage and regulate development. A draft of the public finance law is currently being worked out. It should include orientations and resolutions for restructuring the whole financial management and apparatus. 2.2.4 Reform of the banking system

Until1988 there were only three state-owned banks in the whole of Vietnam: • Central State Bank: played the role of both the central emission bank and the commercial bank, supervising the circulation of money (including issuing of money), supplying short-term loans, and so forth; • Bank of Investment and Development: provided financing for longterm public projects; • Bank of Foreign Trade: provided loans and payment services for all international economic activities, including foreign currency exchange.

Chapter 1 · Economic policy reforms

33

Because the net of the Central Bank extended only to the district level, a large number (about 7,500) of rural credit co-operatives, usually small in size, were established to collect the savings of the population and to provide small loans to peasants. This banking system and monetary policy were subordinated to the requests of national plan targets. The government paid little attention to monetary balance. Long-term credits granted by the Bank of Investment and Development were planned by the Ministry of Finance, while the cash plan was worked out separately for receipt and payment operations by the Central Bank. Reform in the banking system was initiated in 1988 and the decree on commercial banks and credit co-operatives was passed by the Prime Minister on 1 October 1990, dividing the banking system into two categories: the Central State Bank and commercial banks, the latter having developed rapidly. Initially, in addition to two existing commercial banks, two new ones were established: • Industrial and Commercial Bank; • Agricultural Development Bank. The four state-owned banks received primary funds from the state budget, but were duty-bound to operate on a commercial basis. Dozens of share-holding banks were established in urban centres such as Hanoi, Haiphong, and Ho Chi Minh City. Some of them were based mainly on the participation of state units, others on a mixture of state and private units, while the rest were entirely private. At the end of 1990 the first Indonesian-Vietnamese joint-venture bank was established in Vietnam. Today around twenty foreign and joint-ventures banks are operating in the main cities of Vietnam. In total, about fifty domestic and foreign banks have been registered and are operating in the whole of Vietnam. In 1989-90 Vietnam saw an epidemic of urban credit co-operatives. More than 300 such co-operatives were already in operation at the beginning of 1990, controlling deposits of 400 billion Vietnamese dong ( = US$100 million). Not only did private entrepreneurs compete with state saving offices for savings deposits, but they competed amongst themselves as well. Many of them drew in deposits by offering very high interest rates (up to 12 to 15 per cent per month). Moreover they op-

34

Vu Tuan An/1

erated in the way of pyramid schemes. By the summer of 1990 a number of them became bankrupt, and this led to a collapse not only of almost the entire system of credit co-operatives but also of more than 2,000 small businesses. The reputation of credit co-operatives and private banks thus suffered. The banking reform quickly changed the commercial banking system to comprise trade and development investment banks, foreign banks' branches, joint-venture banks, share-holding banks, credit organizations, and financial companies. All the banks are now self-managed and function as business enterprises. Gradually the system of state subsidization providing low interest rate credits will be phased out, and interest rates will stabilize at higher than the rate of inflation. The foreign exchange market also begins to take shape. 2.2.5 Reform of monetary policy and counter-inflation measures

In early 1989 the monthly inflation rate was 5-6 per cent. To overcome the prolonged inflation in the economy, from March 1989 the monthly interest rate was raised to 9 per cent. This higher interest rate strongly attracted the savings of the population and businesses, and bank deposits increased. Parallel to the sudden raising of interest rates, the state carried out a strict control of the expansion of bank credits and allowed state-owned businesses to remunerate their personnel in accordance with the results of their undertakings and other means. These measures checked the galloping inflation. Although the danger of soaring inflation may recur any time, it is quite obvious that as of April 1989, generally the rate of inflation has not risen as quickly as it had in the past, which is encouraging for the reform process (see Figure 2). At the same time that interest rates for bank deposits were raised, the exchange rate was liberalized and allowed to find its own level in the currency market. Up to March 1989 the Vietnamese dong had been devalued a number of times, but the exchange rate never did catch up with inflation. Moreover, there were three different official dollar exchange rates (for external trade, for inward remittances by Vietnamese living abroad, and for non-commercial transactions such as tourism, remittances of foreigners) and two rouble exchange rates (the transferable rouble for trade with CMEA countries, but the clearing rouble for non-commercial transactions). On March 1989 the three above-

0

Figure 2 Inflation rates (percentage per month)

::y Cb

0 Cil -,

rr,

21 20 19 18

0 0

~

0 D 0

17

(lJ

OJ

ra

c

(lJ

~

(lJ

0...

16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

~ (il

0

:::,

::J VJ

1986

1987

1988

1989 Year

1990

1991

1992 0J

()1

36

Vu Tuan Anh

mentioned dollar exchange rates were unified and the rate applied to international trade was devaluated de facto from 900 Vietnamese dong per U.S. dollar in 1988 to 4,500 Vietnamese dong per U.S. dollar in 1989. The average exchange rate for transferable rouble was adjusted accordingly. Such changes greatly increased incentives for export and import. They also provided for the smooth transferability between the Vietnamese dong and foreign currencies within the country. The foreign exchange market began informally in two areas: among economic units and among the population. But since 1992 the state has officially opened two foreign currencies auction markets, one in Hanoi and another in Ho Chi Minh City, which operate weekly and have the participation of many economic units. The exchange rate is linked to the inflation rate and demand-supply relations on the market. The state intervenes in the currency and gold markets through the buying and selling operations of banks, and some state firms specialize in the trading of precious metals. This manner of intervention has positively affected the regulation of gold price and the exchange rate in 1992. It should be noted that in parallel to the success in curbing inflation, mistakes have been made because of the lack of a theoretical foundation and insufficient practical experience in monetary policymaking. The State Central Bank acknowledges that Vietnam still lacks an appropriate monetary policy. Problems such as the establishment and management of a financial market, the determination of the demand for paper money, and demand and supply balance in the monetary market have not been not resolved. The inevitable consequences are that counter-inflationary measures have given rise to declining production and employment redundancies, problems requiring urgent solution. In addition, the high interest rate at the beginning of 1989 has turned an excess of money supply to a big shortage of money in circulation by the middle of the year. 2.2.6 Reform of the legal system

Legislation has continually been reviewed and renewed to keep abreast of the market economy. There has been promulgated a series of legal documents such as laws on private businesses, on share-holding companies, on foreign investment, on banks and credit co-operatives, and other matters relating to business activities in accordance with the

Chapter 1 EconorYJIC pol1cy reforms

37

spirit of the right of all citizens to do business reaffirmed in the 1992 Constitution. These laws on businesses have created a legal basis for all economic activities to function in the market mechanism. In the next few years, the state will continue to perfect the existing legal system, issuing new legal documents when necessary. The land law has been amended to better suit the conditions of a market economy. The civil code, which is an important part of the legal system, is currently being drafted. Also being drafted is a labour code, for resolving labour relations, the benefits, rights and duties of economic units, owners of enterprises and employees, which will be adopted by the National Assembly at the end of 1993. The law on state enterprises determining the legal positions and relations of these enterprises was drafted some years ago, but has not yet been promulgated. The Ministry of Justice is paying more attention to studies on the establishment of an economic jurisdiction agency, which should replace the existing economic arbitration agency, its main task being to attempt to reconcile disputes before they are brought to a law court. Several other essential institutions to be organized include an auction agency, quality inspection department, and legal consultancy offices. Furthermore, some foreign law consultancy firms are beginning to set up branches in Vietnam. Reforming the legal system is a complicated process. It combines two parallel matters: perfecting the legal system and restructuring the administrative and justice, involving the entire political, economic, and social systems from the top down to the grassroots level. 2.2. 7 Reorganizing the management apparatus

The apparatus of economic management is now being reorganized. The 1992 amended Constitution brings the operations of all organizations of the leading Party within the legal framework of the state. Even the highest executive and legislative bodies, such as the government and the National Assembly, are being transformed in accordance with the provisions of the new Constitution; and the National Assembly is increasingly asserting greater authority. The administration assuming the function of state management has had to trim its staff to the minimum and work even more efficiently. The organs in charge of the management of production and service

38

Vu Tuan Anh

must also be reduced in size. In the pipeline are plans to continue with reforms in the administrative apparatus to improve the civil service so that it is in line with the new market economy. 2.3 Renewal of industrialization and external economic policies

The development strategy has shifted from giving priority to the heavy industry and instead concentrate all resources on the promotion of agriculture, the production of goods for consumption and for export. It has changed the economic structure considerably and raised the level of production. Total food output increased from 18.4 million tons in 1986 to 21.5 million tons in the year 1989 and the increase was even greater in the following years, thus changing Vietnam's status from a food-importer to a food-exporter, the annual rice export being more than 1.5 million tons. The spring bumper crop of 1992 led to food output hitting the 24 million ton mark for the whole year. Although industrial production has suffered a temporary decline due to both internal and external factors, it has made no small progress in producing a wider variety of goods and in improving the quality of goods, especially those for consumption. A higher increase in industrial production was recorded in 1992. Besides economic policy reforms, Vietnam has also taken decisive measures to make the economy more outward-oriented. The open-door policy in trade relations with the world and regional markets has been effected through trade liberalization and export promotion by abolishing most import and export quotas, reducing or even exempting taxes, and encouraging the import of raw materials and other inputs of production as well as basic necessities. Citizens are also exhorted to make remittances of earnings from abroad. The government has allowed large economic units to negotiate directly with their trade partners in the international economy. These measures have significantly contributed to a level of production greater than what can be absorbed by the domestic market. This situation of domestic supply exceeding demand checks any rises in commodity prices, and the excess production can be made available for export. This change for the better is also seen in Vietnam's trade balance (see Figure 3). It should be recalled here that in the years 1986-88, the deficit in trade balance was about US$1.3 billion to US$1.6 billion per

0

J

Figure 3 Value of exports and imports (in billion [= 1,000 million] US$)

(l)

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1981

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1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

Year - - - Exports

······· Imports

w

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40

Vu Tuan Anh

annum. This figure had been gradually cut down through the years from 1989: it stood at US$160 million in 1991 and was annulled in 1992, made possible by the higher value of exports. The change of trading partners was a big shock for Vietnam's economy, the consequences of which could not be overcome overnight. In former times, Vietnam's trade with countries lying within the rouble area was greater than its trade with the remaining part of the world. In 1986 Vietnam's exports were valued at 439 million roubles and US$350 million. In 1990 the corresponding figures were 1,111.5 million roubles and US$1,292.5 million. The disintegration of the CMEA has deprived Vietnam of an important export market, and in 1991 Vietnam exported only 80 million roubles worth of goods. The increased exports to the convertible area (reaching as much as US$1,890 million in 1991) could in no way compensate for the losses from the rouble area countries. The reverse process was also seen in Vietnam's imports from those two groups of trading partners. In 1986 Vietnam's imports from the rouble area countries and the convertible area totalled 1,660 million roubles and US$496 million, respectively. The corresponding figures in 1991 were only 290 million roubles and US$1,950 million. This radical shift in the direction of Vietnam's trade was confirmed by the increasing domination of Asian markets in Vietnam's trade. In the year 1992, 79.4 per cent of Vietnam's exports went to Asian countries and 77.5 per cent of its imports came from these same areas. At the same time, Western Europe was the market for 9.7 per cent of Vietnam's exports and it supplied 14.9 per cent of Vietnam's imports. The former rouble area bought 8.6 per cent of Vietnam's exports and sold 4.9 per cent of its imports to Vietnam. Among the Asian countries, Singapore, Japan, and Hong Kong were Vietnam's leading trade partners. The shares of these countries in the total export and import values of Vietnam were, respectively: Singapore - 26.7 and 33.7 per cent, Japan -20.0 and 7.8 per cent, Hong Kong- 17.0 and 11.8 per cent. Vietnam looks forward to extending its trade relations with the former Soviet Union and East European countries, because they are familiar markets for a substantial part of Vietnam's exports, taking up more than US$1 billion of Vietnam's industrial and agricultural production annually. Along with the diversification and expansion of foreign trade relations, reform in foreign investments is seen to be important. A new law

Chapter 1 Economic policy reforms

41

on foreign investment was promulgated in December 1987. This law is considerably more liberal than the foreign investment decree of 1977: wider areas of investment, fewer restrictions in ownership of foreign investors, lower tax rates, a longer tax holiday. Compared with similar laws in neighbouring countries, Vietnam's terms seem relatively attractive. From the promulgation of the foreign investment law up to the end of 1992, forty countries in the world had applied for 556 investment projects in Vietnam. Of these, eighty-six projects had been abandoned or had their licences withdrawn, leaving 470 projects with a capital value ofUS$4.106 billion still in operation. More than US$1.8 billion had been released. Three sectors- industry (35.5 per cent of capital), oil and gas (27.9 per cent), and hotels (16.3 per cent) accounted for 79.7 per cent of the total capital value and 70.9 per cent of the number of projects (see Table 4 and Figures 4-5). The number of projects and volume of capital have continued to rise year after year. In 1992 alone, Vietnam granted licences to about 200 projects valued at US$2.5 billion, an increase by two times compared with the total capital granted in 1991 and equal in value to all investments during the four years 1988-91 inclusive. The value of an average-size project was US$6.5 million. Obviously the prospects are vast for creating jobs, increasing the volume of exports, and raising the quality of infrastructural facilities. Table 4 Foreign investment in Vietnam (up to the end of 1992)

Number of licensed projects Number of operational projects Registered capital (US$ million) Realized capital (US$ million)

1991

1992

1988-92 total

108

150

192

556

76

138

190

470

1988

1989

37

69

23

43

362.8

537.7

600.0 1,220.6 1,905.7

4,626.8

232.2

356.0

443.6 1,132.4 1 ,891.8

4,056.0

1990

~-----··

Source: State Committee for Co-operation and Investment, 1993.

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Figure 4 Registered capital, by sector (as of May 1993: US$6,050 million) Services (4.8%) - - - - - - - - - , Transport and post (3.0%) - - - - - - - ,

Oil and gas (27.9%) r - - - Agro forestry (5.5%)

Hotel and tourism (16.3%) - - - - ,

Others (1.0%) - - - ' Finance and bank (2.6%) _ _ _ _ _...J

Fishery (3.4%) Industries (35.5%)

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Chapter 1 · Economic policy reforms

43

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Figure 7 Growth rates of national income, 1977-92 (percentage per annum; 1976 = 100 per cent) 16 14 12 I'

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Chapter 2 Economic grovvth 1n the reform pmcess

49

The period 1979-80 saw one such crisis. Firstly, the shortcomings and defects of the central planning mechanism and state subsidy-based system took a serious toll on economic productivity and efficiency, especially in agriculture. Secondly, the economy was successively struck by natural calamities in 1977, 1978, and 1979, a significant factor contributing to the declining production in rural areas. Thirdly, the sudden reduction in foreign aid directly led to a serious decline, first and foremost in industry and subsequently in the entire economy, which for decades had been a war-ravaged economy, and had to depend on other countries for raw materials as well as consumer goods. The second crisis, in 1986, was due first and foremost to the failure of the price-wage-money reform initiated at the end of 1985 mentioned earlier. The third crisis, in 1989-90, resulted from a series of measures implemented in early 1989 to adapt economic activities to the needs of the market and to improve the monetary-financial environment. Interest rates were raised to a level that exceeded the index of inflation. The prices of nearly all goods and services, except for electricity, petrol and oil, and transport freight (which were still under state control), were determined by the market. Exchange rates of foreign currencies and prices of precious stones, gold, and silver were allowed to float on the market. State-owned businesses had their finance cut off from the state budget, that is, they had to stay viable without subsidies from the state. Furthermore, the state also relaxed its restrictions on direct dealings between local businesses and foreign countries. When the above measures were implemented, the inflationary spiral was given a break. Stability was restored to the Vietnamese currency, as money lying idle among the population was deposited into saving banks to earn the higher returns offered. Businesses, both stateowned and private enterprises, did not apply for credit loans as before when they were under the subsidy-based system, because they would now have to pay a high interest rate on loans. In the goods market, a reverse situation regarding supply and demand was observed. From the previous situation where there was a serious shortage of goods, basic necessities were now freely available, abundantly displayed on market stands. Buyers were in no hurry to clean off the shelves as things were now more expensive than they were when prices were controlled by the state. Furthermore, as inflation had now somewhat been reined in,

50

Vu Tuan Anh

to the advantage of buyers, people were also less inclined to speculate and hoard goods. Nevertheless, the "shocks" to the macro-economic system engendered a third crisis in production, especially in the domain of industry and construction. The higher prices of inputs of production plus the higher interest rate, which exceeded the index of inflation, meant that enterprises faced a shortage of circulating funds and costs escalated. Meanwhile, the state's open-door policy did not protect the home industry against foreign competition. Foreign goods were freely available in shops and market stalls at prices much lower than home-made ones and the goods were also better in quality. The price of curbing inflation and improving the financial and monetary situation was a temporary decline in production and a higher rate of unemployment: the value of industrial output from both the state and the private sector suffered a steep decline. In 1989 the index of industrial output decreased by 3.3 per cent; of this, the output of the state sector was reduced by 2.5 per cent and that of the collectives and the private sector by 4.3 per cent. It should be noted that in 1990 state enterprises managed to recover and expand production, which achieved a growth rate of 9.6 per cent, but the collectives and the private sector continued to lag behind with a negative growth of 2.3 per cent. For this reason, the total value of industrial production increased by only 4.5 per cent in 1990. The collapse of the former Soviet Union and the East European countries dealt a serious blow to many Vietnamese enterprises, which had all the while been producing goods for export to these markets. It was not until1991 that a number of Vietnam's industrial concerns managed to regain their stability and growth. However, the industrial growth achieved since 1991 is largely the result of output with little value added, such as oil and the assembly of electronic components. Thus, the economic policy reforms have a dual effect on Vietnam's economic growth and development. According to the law of development, radical reforms would disrupt and undermine stability in growth, especially when "shock" measures were used, but they would also compel the economic player to quickly change to adapt to the new environment. Both effects were observed in Vietnam, but they seemed not to be as acute and dramatic as those that had occurred in the East European countries and the former Soviet Union, perhaps because Viet-

Chapter 2 Economic growth in tho mform process

51

nam's reforms have been brought about much more tentatively, with measures implemented by trial and error, after close monitoring of the situation and shifting gear as required to achieve the desired outcome; this differs from reforms in the East European countries. (3) The average annual growth rates attained by the main sectors of the economy in recent five-year plans are given in Table 5, made available by the General Statistical Office of Vietnam. But a close study of the figures reveals something at odds with the economic reforms undertaken: with the exception of foreign trade, production growth rates in the second half of the decade were in fact smaller than those in the first half. For instance, the value added in material production (national income) increased by an average of 6.4 per cent during the period 198185 but by only 3.9 per cent from 1986 to 1990. In 1991, this figure was only 2.5 per cent. The figures imply that the reforms had brought about a considerable reduction in economic growth. This seeming paradox could be explained thus. When comparing average annual growth rates, a judicious choice of the base year to be used is important. The fact that 1980 was the year in which the economy was at the bottom of the 1979-80 crisis is significant, as the growth rates of most indicators for that year were obviously low. Hence using 1980 as the base year for calculating the average growth rates for Table 5 Average annual growth rates of main economic indicators (in percentage)

Population Labour force Gross social output National income Gross industrial output Gross agricultural output Exports Imports

1976-80

1981-85

1986-90

1991

2.33

2.26 3.8 7.3 6.4 9.5 5.3 15.6 7.2

2.0 3.1 4.8 3.9 5.9 3.6 28.0 8.2

2.1 2.6 3.2 2.5 5.3 -0.1 -8.1 -8.1

1.4 0.4 0.6 1.9 11.0 6.4

Source: Statistical Data of the Socialist Republic of Vietnam 1976-1990, 1986-1991 (1991, 1992).

52

Vu Tuan Anh

the period 1981-85 would make the figures larger than they should be. The growth rates of national income in Figure 7 reflect more accurately the direct effects of policies on the economy. The lower growth rates in the 1986-91 period could be attributed to the policy reforms (1989), the crop failure (1987), and the disintegration of the former Soviet Union and East European countries (1990-91). It is in fact commendable that the growth rates, low as they were, could be maintained at all, considering that they were achieved against a backdrop of external political changes and internal upheavals. Furthermore, an examination of the growth rates of Vietnam's gross domestic product below will enable one to see more clearly that material production was not the main sector that had received a boost from the economic reforms. (4) Generally, of the two main sectors that contribute to the national income of an industrializing country, the share of agriculture is less predictable than that of agriculture, as the level of agricultural output is more dependent on the vicissitudes of nature than industry is. Industry is usually able to secure a regular growth rate unless there are massive changes in institutions, policies, or economic and technological integration with external partners. Figure 7 shows the realities in Vietnam from 1977 to 1992, the amplitude of fluctuations in industrial production growth rates being much larger compared with that in agriculture. Industry experienced high growth rates from 1981 to 1985, but a decline in growth rates during 1989-90, a chief cause of which was the disruptive changes in policies at the time. In the former situation, the policies loosened restraints imposed by the central planning system on management at the micro level and also encouraged small private enterprises, which spontaneously boosted production although little attention was paid to macroeconomic management. In the latter case, the shift in macro-economic policies from a reliance on state subsidies to letting the market decide had compelled enterprises to re-orientate and restructure their activities and organization. With regard to agriculture (forestry and fishery included) the natural elements continued to play a decisive influence on the outcome of their productive activities.

Chapter 2. Economic growth in the reform process

53

2 Growth rates of gross domestic product Figures on the growth indices of Vietnam's gross domestic product are available only from 1986 (see Figure 8). For this reason it is not possible to compare the growth indices of this period with indices in the preceding period. Although opinions vary as to the degree of accuracy of the data so far released, what is important is that an international comparative analysis as well as a structural study of all economic activities is now possible. The growth rates of Vietnam's gross domestic product averaged 5.2 per cent per annum from 1986 to 1991, not bad compared with those of other developing countries (see Table 6). A comparison of the growth rates of national income arising from material production with those of gross domestic product shows that the latter exceeds the former by about 30 to 40 per cent in absolute and relative terms. This disparity in the figures can be explained by the fact that the two sets of figures are based on slightly different theoretical concepts. Unlike national income, gross domestic product includes the value added of the non-material sector. That is, a growth rate of gross domestic product exceeding that of national income implies that the non-material sector was increasing faster than material production. This was in fact so. The reverberations of the economic reforms of the past years found expression in the explosive development of trade and services, as reflected in the higher growth rates of gross domestic product and in its structural change (Figure 9). The growth rates of gross domestic product in Figure 10 provide for a comparison of the Table 6 Comparison of annual growth rates of gross domestic product and national income (in percentage)

Gross domestic product National income

1987

1988

1989

3.9

5.1 4.2

8.0

5.1

4.0

3.8

3.7

2.5

2.7

1990

1991

1986-91 average 5.2 3.4

Source: Vietnam Economy 1986-1991 Based on the System of National Accounts (1992, p. 43).

01 ~

Figure 8 Growth indices of gross domestic product (in percentage; 1986 = 100)

180 170 160 150 Q) 0)

Cll

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140

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130 120 110 100 90 1986

1987

I

j

1988

1989

1990

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1991

1992

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